40% of the world live in areas under moderate or high water stress. (2/3 of the pop will live like that by 2025).

Term

Two Current Theories on the Environment

Definition

1. The current development path is unsustainable, and will lead to catastrophic consequences(extinction of species, global warming, extinction of mankind)

2. Societies always have found, and will find, solutions to their environmental problems

Term

Positive Analysis

Definition

If we do this, then that will happen. Looks at reality, and tries to find the truth.

Term

Normative Analysis

Definition

What should be? Value judgment

Term

Positive vs. Normative

Definition

We concentrate on positive analysis most of the time, but sometimes touch on normative questions

Term

Total benefit

Definition

Area under demand curve where price is

Term

Market demand

Definition

Horizontal sum of individual demands

Term

Diseconomies of scale

Definition

Consecutive units become more expensive

Term

Producer Surplus

Definition

Above the supply curve to the price, Total cost is below the supply curve

Term

Efficiency

Definition

An outcome is efficient if all possible surplus (net benefit) is obtainedResult: 1st fundamental theorem of welfare economics

Term

Deadweight loss

Definition

Loss from goods being sold at not the equilibrium price and quantity

Term

Basic condition for efficiency

Definition

Marginal Benefit = Marginal Cost

Term

Pareto efficient

Definition

An outcome is Pareto efficient if no individual can be made better off without making some individual worse off Pareto efficient does not mean fair>Competitive market is Pareto efficient (under some efficient)

1) Estimate the environmental impact in terms of the environmental variables, ex/ how much will pollution emissions change due to the policy2)Place a monetary value on the impact-Valuation of the benefits-Valuation of the costs

Term

3 Types of environmental goods or assets

Definition

1) Use value2) Option value3) Nonuse (existence) value

Term

Use Value

Definition

Value obtained from the environmental good derived from its direct use.Ex/value of crab harvested each year from Alaska...oil spill in Alaska..company will have to compensate fisherman..Use value can help determine extent of damages

Term

Option Value

Definition

Value placed on the option of using the resource in the future.Value beyond use value, since the resource may be used more or differently in the future.Ex/If fishers over extract certain specie and it is extinguished, then the damage of that extraction should include the value of the fish that could have been extracted in the future.

Term

Nonuse(Existence) Value

Definition

It is the value placed on the environment beyond its direct(current or future) use value.Ex/You may be willing to contribute money to help save some endangered species, even though you may never see them, eat them, or benefit in any way..Difficult to measure: WTP for something they never use

Term

Total Value of an Environmental Asset

Definition

TV = UV + OV + NV

Term

Valuation Methods

Definition

Used to calculate OV, UV, and NV.Goal of valuation methods is to put a price tag on environmental assets

Methods based on actual observable choicesMostly used for goods that have market pricesValue can be calculated easily if prices are directly observableEx/use value of the extinction of king crab in Alaska = Present val of extracted crab at market prices

Term

Direct Hypothetical Methods: Contingent Valuation

Definition

Direct hypothetical methods use surveys to elicit willingness to payThe contingent valuation method is the most importantRespondents are asked what value they would place on some environmental assetEx/What value would you place on reducing the contamination of San Diego bay to zero.Problem: You don't actually have to pay, so you may say anything. If forced to pay, your answer may be very different.

Term

Contingent Valuation: Biases

Definition

Strategic Bias: respondents overstate or understate WTP in order to affect policyInformation Bias: respondents are asked to evaluate goods/attributes for which they have little or no experienceStarting point bias: Survey design may influence the answersHypothetical bias: Difficulty of the respondent in correctly picturing the situation

Term

Indirect Observational Methods

Definition

Utilize spending on other goods in order to elicit environ. value of goodEx/Property values are lower in areas of pollution..etcCost of water treatment system can be used to elicit the value of reducing water pollution

Term

Indirect Observational Methods

Definition

Utilize spending on other goods in order to elicit environ. value of goodEx/Property values are lower in areas of pollution..etcCost of water treatment system can be used to elicit the value of reducing water pollution

Term

Indirect Hypothetical Methods

Definition

Surveys that ask respondents to rank a set of hypothetical situations in terms of their desirabilityBundles of attributes to choose from

Survey: involves asking polluters about their control costsEngineering: uses engineering info to estimate the tech needed and the costs of purchasing and using those technologies

Term

Cost Effectiveness Analysis

Definition

Alternative to benefit-cost analysisWe use it when the measurement of benefits is impossible or estimates are unavailable Minimization of the costs of achieving a policy targetVarious proposed standards can be compared for their cost-effectiveness

Term

First Fundamental Theorem of Welfare Economics

Definition

Market outcome is efficient if:- perfectly competitive market- good is a private good- no externalities- g

Term

Externalities

Definition

Welfare of some agent depends not only on her own activities but also on the activities under the control of some other agent (can be positive or negative)

Term

Negative Externality

Definition

Ex/ You drive your car to LA, creating pollution that affects other individuals in addition to youPrivate Cost: Cost faced by the economic agent pursuing the activityExternal Cost: A cost of an activity that falls on people or firms other than those who pursue the activitySocial Cost: Total cost to society of pursuing the activitysocial cost = private cost + external cost

Term

Positive Externality

Definition

Ex/Your roommate installs a water filter, and you get to use it

Term

Problems with Externalities

Definition

Supply/demand do not reflect correctly the total social benefits and costs. MB does not equal MC. We want social MC = social MB.

Allocate abatement across polluting sources such that the MACs for each source are equal."Equi-marginal principle of optimality"

Term

Problems with Standards

Definition

Uniform standards are usually imposedIf abatement cost conditions differ among sources, this will not be cost-effectiveSome firms can meet standards at lower marginal cost than othersForces high-cost abaters to reduce pollution as much as low-cost abatersCould reduce costs if more of the abatement is accomplished by lower-cost abaters

Term

Problem with Standards 2

Definition

In order to reach optimal, we need to know the marginal costs of each firm. In practice, both firms will have an incentive to overstate their costs.

Term

The Market Approach

Definition

Uses price or other economic variables to provide incentives for polluters to reduce emissionsAllows polluters to respond according to their own self interestBrings back the external costs of environmental damage back into the decision making of firms and consumers(internalize the externality)

Term

The Market Approach 2

Definition

Deals with the way environmental objectives are implemented, as opposed to the level at which objectives are setCan achieve a cost-effective solution to environmental problems

Fees imposed on polluting sources that vary directly with the amount of contaminants released to the environment. Internalize cost of environmental damages by pricing the pollution-generating activity"Polluter pays principle"It is a tax imposed on pollution

Not commonly used in practice because need to identify the dollar value of MEC at Qe to know the appropriate tax.If demand changes, then the tax level will be inefficient and will have to be revised.We are not directly taxing what is causing the problem.

Term

Emission charge

Definition

A tax imposed directly on the discharge of pollution.Firm has several options:1. Continue polluting at the same level and pay the charge2. Reduce pollution discharge (and thus tax burden)-By reducing output-By investing in abatement technology

Each firm chooses whatever minimizes costs

Term

Emission Charge 2

Definition

Government sets standard at AsPolluter must pay per unit tax, t, on amount of amount of abatement BELOW standard. Total tax = t(As - Ai) (we are measuring units abated)Or polluter can incur the cost of abating

Term

Assessing Emission Charges

Definition

Emission charges change the incentives facing polluters in two ways:1. Make polluters to account for external costs2. Encourage polluters to seek out cheaper methods of abatement, in order to avoid paying the emission tax

Term

Emission Charges are Cost-Effective

Definition

The correct level of emission charges will enable society to achivee a desired level of abatement in a cost-effective mannerEach polluter independently chooses to abate such that MAC = t.If each polluter faces the same emission charge, then the chosen abatement levels will satisfy the cost effective abatement criterionMAC1 = MAC2 = tTherefore this method is preferred to imposing uniform abatement standards

Term

Emission Charges 2

Definition

Total Abatement Costs --> Real Cost to SocietyTotal Tax Payment --> Transfer of money from firm to government, and gives it back by doing something that benefits society

Term

Conclusion: Emission Charges

Definition

Advantages:Costs are minimizedGovernment revenue is generated, which may be used for monitoring and enforcement costsProblems:Need to set correct chargeMonitoring costs(of emissions)Taxes cause higher prices for consumersIncentive to evade tax through illegal means

Term

Subsidies

Definition

Similar to taxes...The idea is that if a subsidy is paid per unit of pollution abated, then not abating it has a cost (opportunity cost) equal to the subsidy not receivedThen we can change incentives in the same way than with taxes, i.e. we make the polluters to internalize the externality

Term

Pollution permits

Definition

The govt decides the amount of pollution desired and issues permits to pollute up to that amount. Then the permits are either auctioned among potential polluters or distributed among them in some other way.

Term

Pollution permits 2

Definition

With imperfect information about abatement costs, government does not know what tax or subsidy will lead to efficient outcomePermits take the socially desirable quantity of pollution or abatement and let market establish priceWith perfect information, either approach leads to the same out come, but the adv is that with permit systems, you do not need perfect information

Term

Pollution Permits 3

Definition

Traders who buy permits can either use them themselves, or sell them to other polluters later.Each polluter will weigh the costs of abating with the cost of acquiring permitsHigh-cost abaters would be expected to bid for permitsLow-cost abaters would be expected to sell their permits

Term

Pollution permits 4

Definition

There are gains from trade as long as the 2 firms face different MACsThere is incentive for high cost abaters to continue purchasing permits from low cost abaters until MACs across firms are equal

Term

Conclusion: Pollution permits

Definition

To implement this system, we just need to know how much pollution, we can tolerate.

Market determines price.Tradable permit system can achieve cost-effectivenessNumber of permits can be easily adjusted to change the environmental objectiveCan introduce more permits or have government or environmental groups buy them up

Term

Property Rights Assignment

Definition

The problem that causes the externality is that there is no clear property right on some resourceExample: If a firm pollutes the river, in principle it can do so, because "nobody owns the river"This suggests another possible solution: Give the right over the river to some agent (e.g. the firm) and let agents negotiateFor example, the firm may accept payments from the community in order to reduce pollutionWe will see that who receives the property rights is irrelevant for efficiency, although not for fairness

Term

The Coase Theorem

Definition

If negotiation costs are negligible and effected parties can freely negotiate, the resource can be allocated by the courts to either party and an efficient allocation will resultOnly the distribution of costs and benefits among the effective parties is changedRegardless of which party the property right is assigned to, an efficient level of production will resultInefficiency causes the pressure for improvement

Term

Issues with Coase Theorem

Definition

If the property right is assigned to the polluter, pollution could become a profitable activityNegotiation costs are often largeThe number of polluters has to be small, otherwise negotiation is very costly"Victim pays" outcomes tend to be unsatisfactory for society

Term

Solutions to Externalities: Conclusions

Definition

We have seen that there are control and market based approachesIn general market approaches are preferred since they don't need as much information as the control systemsPollution permit systems are increasingly being used with good results

Term

Excludability

Definition

possibility of preventing someone from consuming the good. Unless you pay for it, you can't consume it

Term

Non-Exludable

Definition

No one can prevent you from using it... National security..Once we provide it for a country, difficult to exclude one individual

Term

Rivalry

Definition

It is rival if a good can only be consumed by one person and it is not available for someone else

Term

Public Goods

Definition

Pure private goods: Excludable and rival in consumptionEx: A bottle of Coke, a restaurant mealPure public goods:Non-excludable and non-rival in consumption. Examples: National defense, air, city, landscape

Term

Public Goods, Implications:

Definition

For a non-rival good, the marginal cost of providing the good to an additional consumer is zero--> It is socially efficient to provide the good to as many consumers as possibleFor a non-exclusive good:any consumer who wants to consume the good can consume it--> Non exclusiveness gives rise to the free rider problem:No consumer has an incentive to pay for the provision of the public good as long as other consumers provide it

Term

Public Goods: Inefficient Provision

Definition

Free rider: Someone who derives benefits from a commodity without contributing to its supply, causing underprovision

Example: You refuse to contribute money to the preservation of whales, but go often to watch them. Others?

Public goods will be under provided in a competitive market

Term

Public Goods: Problem of Market Failure

Definition

In a competitive market, there is no or insufficient incentive to provide a public good.You can think of this problem as an extreme form of an externality: An individual who provides the public good will be able to enjoy it herself and at the same time has a large positive externality on all other consumers.Also, even if a good is exclusive and therefore there is no free rider problem, it is inefficient to exclude someone from consuming a non-rival good that has already been produced.

Positive externalities cause inefficiencies.

Term

Efficient provisions of public goods:

Definition

Since all consumers can consume the public good at no extra cost (i.e. it is non rival) we will add their individual marginal benefits(demands) to find their total marginal benefit (vertical sum of demands)Then we set total marginal benefit equal to the marginal cost and find the optimal quantity of the public good that should be provided.

Term

Lindahl Solution

Definition

In theory, the optimal provision of public goods can be achieved if all consumers contribute an amount equal to their individual marginal benefit of consumption.Individuals might be willing to be taxed for public goods if they knew others were being taxed. Each individual would be presented by the government with the proportion of a public good's cost he was expected to pay and then reply with the level of public good he would prefer.

Term

Public Goods 2

Definition

Each individual has an incentive to free rideThat causes the market to provide less than the efficient quantity (that quantity maximizes total surplus)By free riding, an individual can increase his/her own surplus at the expense of othersBut in the end, there is a net loss due to free riding, i.e. gain by some is less than the loss by othersLindahl solution problems:-free riding-imperfect information about who benefits from the good

Term

Determining private benefits

Definition

Optimal public goods provision requires knowledge of each person's marginal benefit. In practice, one needs to use estimates based on:-Market values, e.g. wage as estimate of value of time-Survey results

Using that information, the govt. can collect taxes and then provide the optimal amount of that good

Term

Monopoly

Definition

Single firm serves the "relevant market"The demand for the firm's product is the market demand curveFirm has control over the price-But the price charged affects the quantity of the monopolist's product

Term

Sources of Monopoly Power

Definition

Economies of Scale (cost per unit is cheaper) ex/water utilitiesPatents and other legal barries (like licenses, copyrights)Exclusive contractsCollusion (OPEC)--> Assign quotas, control quantity of oil that's available and thus price

The beneficial effects of economies of scale on price and output may outweigh the negative effects of deadweight lossEncourages innovation

Term

Monopoly: Solutions

Definition

Regulation:-Marginal cost pricing: The gov't requires the monopoly to sell at MC. The problem is that at this cost the monopoly may lose money, and therefore it will require a subsidy from the govt to operate under these conditions.

Average Cost Pricing: Require the monopolist to charge a break even price

Subsidies: The govt subsidizes the monopoly for producing above the monopolistic quantity (up to the efficient quantity)

Term

Problem 1 with Marginal Cost Pricing

Definition

It requires knowledge of MCIf Regulated Price is too low: DWL is larger without regulation

Term

Problem 2 with Marginal Cost Pricing

Definition

Possibility of ATC > Pc.Zero long run output for the monopolist, since it looses on every unit sold.Government will have to subsidize the firm to convince it to produce.

Term

Problems with Average Cost Pricing

Definition

As with MCP, the government needs to know the cost curves of the firm, information that is not usually availableACP is still inefficient, since for efficiency we need P = MC, not to AC.Less incentive for firms to reduce costs, since they charge AC.

Term

State ownership and management

Definition

Government sets P = MC covers any losses.One problem is that public firms are usually more inefficient than private firms.So, though P = MC, MC is not the lowest possible.